If there's one thing we've learned from the past decade-or-so of economic history, it's that credit is tricky. On one hand it enables people, businesses, and nations to do things they never could do otherwise; things like buying a home, covering a new restaurant's start-up costs, or building rails and roads. On the other hand, it lets people buy homes they can't afford, extends money to bad ideas, or funds unending war.
Like most things, credit isn't good or bad. It's just a form of power that can be used to fund good ideas or bad ones. Like most forms of power, unless you have rules to how it's allocated, you run the risk of mass-foreclosures, corporate implosions, and yes, unending war.
All of us, from the personal to the multinational, need to redefine our relationship with credit. One of the maxims of self-help financial gurus is to allocate your paycheck towards specific things. A couple hundred dollars for groceries. A fund for a vacation, another for a new TV, etc. Maybe something for retirement if there's any left. Credit cards should be for things you can realistically pay off, and they shouldn't be paying the rent every month. We have all learned these lessons one way or another. Easy credit reduced our impetus to maintain a household budget, or for that matter, for our employers to pay us more.
Of course the government isn't a household. People can't just decide to earn more or less money, like the government can with taxes. And most people don't have hoards of others offering little-to-no interest loans into perpetuity, like the market for US T-bills. If the government doesn't have enough money to do the things that people elected it to do, it can raise taxes, find things to cut, or barring all else, it can borrow. Like households, we made conscious, collective, deeply negative choices in how we've handled our budgeting. That's politics.
People demand things like Social Security, Medicare, and Defense. In fact, that's over 60 percent of what we spend. We demand these things, and since the borrowing is so cheap, nobody wants to pay for them. But there is a difference. Social Security and Medicare are budgeted for. We have dedicated payroll taxes for each of those programs. In effect, Social Security and Medicare work like that household fund to buy a new TV. Most of us accept that some of our money will be put away so we can have basic security one day. We make no such sacrifices for defense. If we want a war, our generals yell "charge!" and we pull out our American Express.
In order to have the lifestyle we're accustomed to as a nation, we probably need to earn more money than we are now. Since the whole "small government" idea goes against what most people actually want, we probably need more in tax receipts. Fine. If we went back to the rates in the nineties, most of our problems with debt would disappear. But the underlying problems of profligate spending without sacrifice. If debt is cheap, and war is a profitable activity that always seems to have enough volunteers, then where does it end? How can we determine as a nation when we've had enough? Why the hell are we still racking up tens of billions of dollars a month in bills for a decade-long jaunt through nowhere, Central Asia?
I'm not arguing here that war isn't worth it. That's a separate discussion altogether. I'm saying that, like retirement and health care, if it's worth it, we should pay. Here's what I propose:
A war tax. If congress declares war, there should be a levy on all consumption to pay for it. Every time anyone goes to a cash register, they will be reminded that we are at war, and that we must all sacrifice something to do so. When there is peace, the tax goes away. Of course there are major details to hammer out. What percentage would the tax be? What's the difference between a war and a conflict? How do you keep the Pentagon from burying its costs behind the line items? What if we need to devote 50% of our GDP to another world war? But the overall principle is sound.
The principle could be part of a larger legislative package. If people really want Social Security and Medicare, they should either pay the taxes necessary to cover their growing expenses, or demand changes to the programs. There are real choices we can raise the rates of the payroll tax, or raise its income threshold beyond the paltry cap of around $106,000, so people who earn more contribute the same proportion of their incomes as the rest of us. We can also cut back on benefits. We can still have the argument over how big government should be, but war should be part of that. If people want war, they should be taxed for it, and we should debate whether it's worth it.
Leave the general income tax for discretionary spending and debt service. Use credit to make public investments with clear returns, or help out in recessions. Write this all into law and be done.
There's a time and a place for war, and there's a time and a place for credit. But there are few times or places where war should be paid for with credit. There is a clear moral hazard in giving Carte Blanche to a large segment of industry to spend however they see fit in the name of defense.
Credit is neither good nor bad. War is usually good and bad. Even the most just wars are a whole lot of bad for a little good. Even the most generous credit or the most just war is bad when they're without a clear end in mind. We need to be reminded of that.
